What to Know About Store Credit Cards

The lure of applying for a credit card at the cash register to snag a discount can seem like a good idea. Especially during a busy holiday season, store credit cards might provide more options when it comes to stocking up on gifts, decorations, or other festive purchases.

Applying for and obtaining a credit card from your favorite stores can be a good way to get benefits or rewards such as discounts, points, cash back or free shipping.

But store credit cards also come with certain drawbacks that you should know about.

What is a Store Credit Card?

Store credit cards come in two basic types:

• Closed-loop store cards – These are cards that bear the name of the merchant and can be used only at that store or a group of affiliated stores.
• Open-loop store cards bear the merchant name as well as the logo of a payment network like Visa or Mastercard. They may offer special benefits at the merchant named on the card, but you can use them anywhere the network’s cards are accepted.

How is a store credit card different than a bank credit card?

Store cards and credit cards are very similar at first glance. Each one can be used to make purchases to be paid off at a later date. Store cards can be easier to apply for and get approved for while providing exclusive discounts and promotions at participating retailers. However, most store credit cards can only be used at those retailers and often charge higher interest rates.

General-purpose cards tend to have the broadest rewards programs. Depending on the card, you might be able to redeem for cash back, travel, gift cards, merchandise or something else.

If you have a store credit card, your rewards will probably focus on perks offered by that individual retailer. These tend to focus on cash back, either as statement credits or as funds you can apply to offset future purchases.

What are the key facts to know about store credit cards?

Generally, store credit cards are easier to get approved for than many credit cards and often have the convenience of application and approval during a transaction. Many stores offer additional discounts, promotions, and special financing once you are approved. Stores usually have a rewards or loyalty program system that can be used in that store. If used responsibly, store credit cards can be a tool for building credit as they tend to be easy to qualify for and can be a good starting point if you’re looking to establish a credit history from scratch or to rebuild your credit score. Generally a store credit card does not have an annual fee.

Even though there are advantages to store credit cards, there are some reasons why a store credit card debt is worse for consumers than a credit card. Most store credit cards can only be used at specific retailers. Store credit cards tend to have lower credit limits which may result in higher utilization and on average the interest rates are higher on store credit cards than bank cards. Store cards charge an average APR of 25.77 percent, according to CreditCards.com’s 2021 poll, so the cost of carrying a balance will quickly outpace your rewards potential.

Store credit cards carry potentially misleading terms. Many “0 interest” store offers are actually deferred interest promotions, meaning that if you have any remaining balance at the end of the promotional period, you’ll be charged retroactive interest on your average daily balance all the way back to the beginning.

Are store credit cards easy to get?

Retailers often make it easier to apply for a store card compared to getting a credit card. Cashiers often encourage shoppers to apply for a store card at checkout with a promotion on their purchase. And in many cases, you can apply by providing your identification to the cashier and the application decision is instantaneous. Store cards are generally easier to get approved for than a traditional credit card because they typically don’t require credit scores as high as most major credit cards.

When does it make sense to use a store credit card?

• Consumers who frequently shop at a particular retailer or retail chain may get better rewards and perks (like coupons, cash back, free delivery or alteration, early access to exclusive items and events) when using that store card versus a general-purpose credit card.
• Store cards that offer sizable rewards at multiple stores, have a considerable signup/welcome offer, $0 annual fee and a low(er) APR could be useful for the consumer who uses that store card to make the purchase, and works responsibly at paying off the store credit card balance. Automate payment from your checking account to ensure the balance is paid off in a timely manner.
• For persons who need to establish credit history or rebuild their credit, store credit cards typically are easier to qualify for. But this can come at a cost – a much higher interest rate or APR if you carry a balance.

What are some potential pitfalls of using a store credit card?

Consumers should fully understand credit terms (interest rates, special financing, fees, etc.) before they enter into any credit card agreement. Consumers should be cautious about those impulsive offers encouraging them to “save 15 percent off that day’s purchase if they open a store credit card.” If the purchase amount is not soon paid off, the cost of carrying a balance on that store credit card will soon overtake any short-term savings. Store credit cards often have low credit limits. A sizable purchase could result in high credit utilization, which could affect the consumer’s credit score.

Additionally, differences may exist in the amount of protection a consumer has when contesting charges. With a store credit card you may still be able to contest charges and get them reversed, but that coverage may not be as robust or comprehensive as with a bank credit card.

When it comes to store credit cards you may want to consider these tips to make sure your money is protected:

• Review the rules of the card. Understand the card’s terms and conditions before finalizing the card application. This can alert you to restrictions and limits that you might not otherwise be aware of, including when rewards expire and how you can dispute charges.
• Review your statement each month. An errant charge could be a simple mistake or the first sign of fraud. Taking a few minutes to review your monthly statement can help you catch and fix any problems quickly. Some cards come with time limits on when you can dispute charges.
• Save your receipts. Keep close track of your records when you are disputing a charge; it can be easier to follow up and get a resolution.

What credit score is needed to get a store credit card?

Store credit cards typically have more relaxed qualification requirements; however, credit card issuers do not specify the average score necessary to obtain a retail credit card. You don’t need perfect credit to get approved for a retail credit card, which can make applying even more tempting. Some store cards will approve applicants with scores as low as 550, which is considered poor. There is no defined range for a fair credit score, but typically a FICO score between 580 and 669 are considered fair.

Other factors in addition to credit score can be considered when reviewing applications. Your employment status, ability to pay, willingness to pay and credit score are all factors used to determine approval. The economy also plays a role in your ability to qualify for a retail credit card. Creditors tend to tighten lending standards in a sluggish economy. When the economy is booming, standards are often more relaxed.

Will store credit cards impact credit score and credit history?

The impact of store credit card debt on your credit score and credit history is very similar to bank credit cards. Items like credit utilization and payment timeliness play a critical role in the way credit bureaus calculate your credit score. How much of your credit limit you use has a major influence on your credit scores. Before applying for a store credit card consumers should consider the following cons of store credit cards:

• Store credit cards often have a low credit limit tied to higher interest rates. Average interest rates for store cards for store cards are some 6% higher than the average interest rate for new (general-purpose) credit card offers. With the increase in federal interest rates over recent months, the cost of using credit now – either general purpose or store credit – is much higher and therefore credit should be used prudently.
• When you apply for a store credit card, you typically get hit with a hard inquiry when the issuer pulls one of your credit reports. A hard inquiry can stay on your credit report for about two years and the inquiry can cause a small, temporary dip in your score
• Additionally, a new account causes the average age of your credit accounts to decrease. Credit age is a minor factor in scores, but every point counts.

How can I pay off store credit cards?

Be it a store credit card or general-purpose credit card, responsible use of credit still applies. Paying off a store credit card debt requires consumers to pay bills on time, try to pay off the balance when possible or pay above the minimum payment, and keep credit utilization below 30%.

Credit cards are for convenience, not as a way to supplement income. At GreenPath, we work with people daily to use credit responsibly. Contact a trusted non-profit financial counseling agency like GreenPath (800-550-1961877-337-3399) for a free initial financial assessment. Certified counselors can review your income, expenses and budget, review credit card terms and help you manage debt as well as cover your household essentials.